By Eric Lascelles, RBC Global Asset Management
China now commands the world’s attention, having transformed itself into an economic superpower that generates a startling one-third of global economic growth. In a growth-scarce world, the thought of losing even a smidgen of this is unsettling.
For this reason, it is of crucial important to track the constellation of vulnerabilities and unknowns that orbit China. Among these, the country’s housing market is a subject of disproportionate importance. This is due to its centrality, its sheer heft, and also its seeming vulnerability.
Housing acts as something of an economic fulcrum that exerts an outsized influence over China’s banks, heavy industries, builders and households. We figure it is directly or indirectly responsible for a whopping 19 per cent of China’s economic output. Read more
China continues to dominate discussions about the health of the world economy. Many are concerned about the country’s slowing growth and its ability to manage the difficult transition from a controlled economy dominated by manufacturing to a more open economy with greater reliance on domestic consumption. Some policy decisions last year also scared the market.
While the risks are many and real, they are manageable and well-understood by China’s policy makers. This is not the time to sell China short. Read more
By Michel Lowy, SC Lowy
Traditionally, investing in Asian high-yield bonds has not been for the faint-hearted. Yet in recent years a new normal emerged; just about any bond delivered strong returns. Such has been one of the results of the extremely accommodative policies of major central banks that have flooded the markets with liquidity, thereby dulling the perception of risk.
However, all this changed last year when steep falls in oil and commodities prices,
together with US high-yield fund redemptions, led to a liquidity shakeout
in the high-yield bond market. The new reality rewarded a discriminating investment strategy – with the Chinese property sector’s high yield bonds returning gains of 20 per cent, even as other market segments such as Indian issuers and Chinese industrials experienced single-digit losses. Read more
While the word has focused on China’s disastrous stock market bailout and the devaluation of the currency, a far larger crisis is brewing in China’s hinterland.
China’s property bubble has sagged in the big cities like Beijing and Shanghai – but it is on the verge of popping completely in the country’s heartland. After spending a week in Sichuan Province, it is clear that land sales, prices and transactions are all declining in double digits.
Sichuan province is one of China’s largest, in the heart of the country. We spent some time at a residential project called Universal City Centre, about 20km from Chongqing. The 1.08m sqm property has seen prices fall one-third from 4,000 to 5,800 psm one-third to 3,000 to 4,000 psm. Read more
Over many years, China has gained acclaim as the world’s manufacturing powerhouse. But today, innovation is flourishing in the world’s most populous nation, which is rapidly becoming a trendsetter with the potential to disrupt business models globally.
On a recent research trip to China, we were struck by the huge enthusiasm for locally developed smartphones and the entrepreneurial spirit sweeping the country. Indeed, the number of patents filed by Chinese residents has surged in recent years, both locally and abroad, to exceed the world’s largest developed economies. Read more
The ever ingenious Chinese financial system has developed a new kind of shadow bank – insurance companies.
China’s $586bn stimulus package in 2009 caused a flurry of lending through the country’s financial arteries. Some of this money ended up leaking out of the banks into unofficial channels, including the country’s state banks and the giant provincially-owned pseudo banks called Trust Companies. By the end of 2014, these off-balance sheet loans accounted for 18 per cent of all financing, up from less than 2 per cent a decade earlier. Read more
The first whispers of worry about a Chinese property bubble surfaced in late 2009. Since then, the local real estate market has quickened and slowed in line with government measures to stoke or cool the market, but has never crashed. Nonetheless, some market watchers insist that the Chinese property bubble will burst one day. Recent sector weakness has given them further ammunition, as has the near collapse of Kaisa, a mid-sized Shenzhen-based developer.
Until December 2014, Kaisa’s finances were perceived to be strong and sales were rising. Now its survival is at the mercy of lenders and rivals. Its woes started when the government halted some of its Shenzhen projects in December without giving a reason. The chairman abruptly resigned, while debts to banks and bondholders have gone unpaid and the firm is in the process of being acquired by its competitor. It has yet to reach a consensual solution with its creditors. Read more
By Andy Rothman, Matthews Asia
Will China’s real estate market crash? No, not in my opinion. China’s residential property market is significantly softer now. But I believe there is very little risk of a crash. House prices are stabilising in China, and are likely to rise again by the second half of this year on a year-over-year basis.
But keep in mind that because of the base effect, prices are likely to fall year-on-year at a steeper rate through much of the first half of this year, leading to a growing chorus of predictions of a housing crisis. Read more
By Gabriel Sterne and Alessandro Theiss, Oxford Economics
If there was a financial crisis in China, the government could take a big hit, transferring a huge chunk of bad debts onto its balance sheet. But this remedy would have a big impact on the domestic and global economy.
Overall debt (public, private and financial) has skyrocketed in recent years, rising from 176 per cent of GDP in 2007, to 258 per cent of GDP by mid-2014. The debt binge may be fuelling a time bomb in the property market. Read more
Clearly, China’s interest rate cut on Friday was motivated by a desire to manage a flagging growth story. But the announcement also revealed a few sub-plots, which together may say more about Beijing’s mindset than the dominant narrative.
The first point, several analysts said, is that Beijing’s monetary easing may well have further to run, following the decision by the People’s Bank of China (PBoC) to cut its benchmark lending rate by 0.4 percentage points to 5.6 per cent, while cutting its deposit rate by 0.25 per cent to 2.75 per cent. Read more
By Xiao Qi, China Confidential
China’s shadow finance sector has become a global concern. The International Monetary Fund (IMF) and World Bank have both warned about the risks associated with the rapid build-up of assets within such an opaque sector, while central bankers now regularly reference Chinese shadow finance as a key potential risk to global economic stability.
But while concern over the lurking horrors in China’s financial shadows remains justified, regulatory actions mean that the systemic risks that they pose are finally starting to ebb. This is happening in spite of the fact that the overall scale of the shadow system is continuing to expand. Read more
There may be some light at the end of the tunnel for China’s beleaguered housing market, according to a survey of real estate developers by China Confidential. Home sales growth in October was the highest in 18 months, while a separate survey of urban consumers shows home buying sentiment at a multi-year high.
China Confidential’s monthly survey of 300 real estate developers across 40 cities, showed a sharp rebound in sales volumes in October, with companies reporting the biggest month-on-month increase since March 2013. Developers reported an even larger expansion in sales inquiries, suggesting that many potential home-buyers remain on the side-lines. Read more
The downturn in China’s property market is well documented, and one of the biggest points of interest for global investors. Whether you mine copper, sell TVs, or buy bonds, chances are the Chinese housing market matters to you somehow.
With that in mind, we’d like to present this handy chart from Moody’s – showing the annual price changes for newly completed apartments in China. It’s quite telling. Read more
GDP growth. Third-quarter growth could be the slowest since the depths of the global financial crisis, when China reported 6.6 per cent growth in the first quarter of 2009.
A reported export surge in September is failing to dispel the gloom suffusing forecasts for China’s third quarter GDP growth, which several economists predict will slump to a five-year low.
One problem lies with the export numbers themselves, which raise suspicions that over-invoicing may once again be artificially inflating export statistics as Chinese smuggle hot money into the mainland from Hong Kong to take advantage of an appreciating renminbi. Read more
By Andy Rothman, Matthews Asia
China’s housing market is one of the most important parts of its economy, and also one of the most misunderstood. This sector is important because residential real estate together with construction last year accounted directly for about 10 per cent of GDP, 18 per cent of fixed-asset investment, 10 per cent of urban employment and more than 15 per cent of bank loans. It is also misunderstood because few observers appear to grasp the structure of China’s residential market. Read more
China stepped up its efforts on Tuesday to transform doomsday scenarios for its domestic property market into merely another round of déjà vu. The central bank reinforced efforts to boost mortgage lending by banks, building on the small but significant turnaround that beyondbrics noted in mid-September.
The new policies allow buyers who already own one home but have paid off their mortgage to be considered as first-time buyers, thus qualifying for a mortgage downpayment of 30 per cent of the cost of the loan. Previously, they would have been considered as second home buyers and had to pay a downpayment of at least 60 per cent. Read more
A closely-watched indicator of economic activity in China is showing an unexpectedly robust reading for September, according to an announcement on Tuesday. But is a real growth rebound underway, following several signs of a slowdown in the third quarter so far?
Hong Kong stock market investors appeared to reserve judgement, allowing the Hang Seng index to slip 0.49 per cent, or 118 points on Tuesday to 23,837. Economists and other survey-based indicators of Chinese economic activity reinforced the skepticism. Read more
Headline statistics on the Chinese property market continue to relay a picture of virtually unrelieved gloom. However, in one small but important area, market pressures appear to be easing.
All year long Chinese banks have tightened up on mortgage lending to both first time buyers and purchasers of second homes, withdrawing discounts on mortgage loans and restricting loan growth – and thereby depressing buying activity.
However, this changed in August, with banks switching course to offer softer terms on mortgage loans, research companies said. Read more